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Pankaj Tyagi
| Updated: 14 Jan, 2022 | Category: Compliances

Red herring Prospectus: Explained

Red herring Prospectus - Understanding its Role from Investor's Standpoint

Red herring Prospectus refers to a prospectus that does not enclose entire details of the quantum or price of the securities entailed therein. In layman terms, a red herring prospectus encloses most of the details regarding the company’s business affairs and future prospects but does not enclose critical share information such as its numbers or price.

Role of Red Herring Prospectus as per Company Act, 2013

Red herring prospectus encloses information about the organization’s operations and prospects. However, it does not offer key detail pertaining to the issue, such as its price & the no of shares offered. A red herring prospectus shall adhere to the same obligations as are applicable to a prospectus, and any difference between these two shall be reflected as variations in the prospectus.

Upon the closing of the offer of securities, the prospectus reflecting the overall capital raised, whether via debt or share capital, and the closing prices of the securities and other information that are not enclosed in the red herring prospectus shall be filed with the RoC as well as the Securities and Exchange Board.

Where can investors locate the Red Hearing Prospectus?

Investors can locate a Red Hearing Prospectus at any of the given places:

  • SEBI’s official portal under the “Offer Document” section
  • Stock Exchanges’ s official website under the Merchant Bankers section

After furnishing the Red herring prospectus to SEBI, the issuing company should make a public announcement via at least one newspaper. The newspaper can be English, Hindi, or Regional language.

Detailed to be looked out in RHP from Investor’s standpoint

Red herring prospectus entails the following sections and usually briefs them out in an explanatory manner to better clarify the company’s financial standing. It is vitally important for investors to carefully dig down these sections to make an informed decision regarding future investment. 

Details of the Offer

This section facilitates detailed information about the IPO, including the no of shares offered through fresh issue and offer for sale. Furthermore, it also facilitates a break-up of the QIB (Qualified Institutional Buyers)[1], Non-Institutional, and Retail portions.

Capital Structure

This section renders info regarding the Equity Share Capital of the issuing entity as of the date of the RHP. This includes the following;

  • authorized share capital and issued, subscribed
  • paid-up capital prior to the offer

It also entails detail about the history relating to equity share capital held by the company’s promoter.

Objects of the Offer

This section clarifies how the entity projects to use the funds collected via the IPO. As an investor, this info can be utilized to determine if the company is paying attention to growth factors or shall utilize the fund to repay debt, to fulfill capital requisites, or any other vital goals.

Industry overview

A red herring prospectus entails detail regarding the company’s standing compared to its rivals. The performance trend of the concerned industry is also enclosed in the document. If you are aiming to invest in a specific organization’s IPO, you must consider various business and economic variables at play, the supply and demand mechanism, and the future possibilities.

Business Description

This section pays attention to the company’s core operations and briefs out how it performs the business affairs. As a shareholder, you must emphasize this section as the organization in its core business will use your investment.

Financial information

This section is quite important as it entails critical information such as the company’s audit reports and financial statements. As a potential investor, the financial statement will aid you get familiar with the company’s financial standing in the past.

It will also provide adequate clarity about how future dividends will stand out based on the profits disclosed. Based on these details, you can figure out whether it is profitable to make future investments in the company.

Strengths

This section manifests the company’s strength in details- both internal and external. These factors distinguish the company from its rivals. It is imperative to dig deeper into this section only after understanding the company’s business affairs and its competition. Simply put, this section predicts the potential of the company from the investor’s viewpoint.

Strategies

This section briefs out the strategies leveraged by the company to establish and thrive in its business. This can include the following;

  • geographic strategies
  • product-level strategies
  • market-level strategies

This section sheds light on the approach adopted by the company to reap profits.

Risk Factors

Companies briefs out the major risk that could hamper their business and operations under this very section. While many are prevalent risks, some risks seek in-depth evaluation. For instance, if you come out with a finding that the company has yet to clear several due legal cases, it may be beneficial to avoid the IPO. As an investor, you must have the potential to pinpoint the real risk that could jeopardize the company’s growth in the future.

Management

This section briefs out key details of the company’s directors, promoters, and other management officials, such as names, qualifications, and designations. It also specifies any criminal cases or pending litigations against these people. Thus, it is vitally imperative to dig down this section carefully to avert any future complications.

Promoters and Promoter Group

This section renders complete particulars about the company’ promoters and/or promoter group

Dividend Policy

Companies are not under any mandate to disclose dividend policy. But, some companies voluntarily reveal such information in this section owing to the presence of a formal dividend policy.

Conclusion

Red herring prospectus serves as a legitimate source for determining a company’s prowess in terms of financial stability. Apart from that, it keeps the investors on the edge when it comes to making an informed decision regarding future investment. Although it is a lengthy document, it renders a plethora of crucial information regarding the company’s operations and financials to the potential investor.

Read our article:Penalty for Non Filing of Annual Return with Roc under Companies Act 2013

Pankaj Tyagi

Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.

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